Kenya loses 36 private equity investors in 10 years

by MMC
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East Africa also reported 478 private equity deals and closed $8.6 billion in private equity funds during the same period.

Over the past 10 years, there have been 51 capital investment exits on 427 investments (and 478 private equity deals worth $8.6 billion) in the East African market, according to the East Africa Venture Capital Association (EAVCA). The region recorded an increase in exit activity in fiscal 2022, marking the highest figures in a decade. The financial services sector saw 14 exits, followed by healthcare and energy, with nine and seven exits respectively. Kenya leads the pack with 36 releases per country, followed by Uganda with eight and Rwanda with three. Tanzania and Ethiopia recorded two and one exits respectively.

Private equity exit in East Africa. Image source, EAVCA

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However, these are the reported numbers, with a high probability that outflows are higher as some are not officially reported or disclosed.

“While data suggests only 51 exits over the past decade, anecdotal evidence suggests a higher number due to investments divested to founders and management and not disclosed,” EAVCA said in a statement. “The data also does not take into account investments that are abandoned through forced liquidation.”

Projections show that 2023 will exceed this performance. This increase in outflows is a promising sign for the next five years, as investments made over the past seven years mature and fund cycles conclude. These exits become crucial for new fund managers seeking follow-on funds from limited partners primarily focused on development finance institutions (DFIs) in the region.

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The EACVA clarified: “Excluding outliers, the average holding period in the sector has been (approximately) 7 years for exits recorded between the financial year 2014 and the first half of 2023, with a general trend downward until the COVID period. These are remarkable figures, considering the macroeconomic, geopolitical and weather turbulence in the region during the period under review and their impact on profitability, which then influences valuation.

How Private Equity Investors Exited the Market

According to the EAVCA report, private equity investors are exiting primarily through three routes: sale to commercial players, secondary buyouts and management buyouts (MBOs). Only one IPO exit occurred during the decade. Often, sales to commercial players, primarily from Europe and Asia, are the most popular exit route. However, the exit landscape is evolving, with secondary buyouts outpacing sales from commercial players and buyers expanding to include pan-African and regional entities. “The increase in secondary redemptions is recent and driven by several factors, including an easing of restrictions on secondary redemptions and an increase in the number of funds that will now execute majority transactions, and in addition, secondary capital only transactions.”

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The complexity of private equity exits

Exits from private equity are naturally complex, often marked by multiple factors. The complexities arise from various exit options, including trade sales, IPOs and secondary buyouts, each requiring a unique strategy. Timing is everything, as choosing the optimal time to exit involves a delicate balance between maximizing returns and minimizing risks.

“Private equity exits are extremely topical in the East African private equity community, both because of their complexity and their somewhat elusive nature, as evidenced by the contrast between transactions publicly disclosed private equity (money inflows) and private equity outflows,” EAVCA added. in a report.

Financial engineering, such as leveraged buyouts, adds another level of complexity, which requires careful management during exits. That’s not all, as regulatory compliance and due diligence requirements influence exit strategies, particularly in cases of public offerings. Other factors that make private exits difficult include trading conditions, tax considerations, managing leadership transitions and aligning with market conditions.

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